The recent Queensland decision of Agripower Australia Ltd(Agripower) v Queensland Engineering & Electrical Power Ltd (QEEP) & Ors [2015] QSC 268 has highlighted that a contract between the parties that is illegal and unenforceable cannot be relied upon to found a claim under the Queensland equivalent of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

In that decision, it was held by Justice Douglas that the adjudicator's decision under the Queensland equivalent of the SOP Act in favour of QEEP was void because the contract between the parties was illegal and unenforceable by virtue of QEEP's breaches of two statutory provisions. The breaches by QEEP involved:

  • advertising it performed electrical work when it did not hold electrical contractor's licence in contravention of section of 56 of the Electrical Safety Act 2002 (Qld); and
  • carrying out professional engineering services when QEEP and its agents were not practising professional engineers contrary to section 115(1) of the Professional Engineers Act 2002 (Qld).

The finding that the contract was illegal, meant that QEEP was not entitled to progress payments under the Queensland equivalent of the SOP Act. It followed that the adjudication decision under that act was void for jurisdictional error.

This decision highlights one of the circumstances in which the SOP Act cannot be relied upon. However it is useful to revisit some of the other limited circumstances in which a claim or proceedings under the SOP Act can be resisted.

RESISTING A CLAIM UNDER THE SOP ACT

Ordinarily a debtor will not be entitled to raise any defence or to rely on a set off or counterclaim to resist court proceedings brought by an applicant to recover a debt under the SOP Act: sections 15(4)(b) & 16(4)(b) of the SOP Act.

However, there are at least three instances where the SOP Act (a NSW Act) is ineffective against Commonwealth legislation by virtue of s109 of the Australian Constitution as follows:

  1. where a Creditor's Statutory Demand (CSD) is issued to a company debtor;
  2. where a company creditor becomes insolvent; and
  3. where service of a payment claim under the SOP Act is ineffective because it involves misleading and deceptive conduct.

1. CREDITOR'S STATUTORY DEMAND (CSD)

If a company debtor has failed to respond to a payment claim under the SOP Act and a CSD is subsequently issued to that debtor, the debtor will not be prevented from raising a defence or set off in seeking to set aside the CSD. This is because a CSD is issued pursuant to the Corporations Act 2001 (Cth) (Corporations Act), a Commonwealth Act, which overrides the SOP Act, a NSW Act, to the extent of any inconsistency.

The take away message from this is that if you have a claim for a debt under the SOP Act against a company debtor, you should commence proceedings against the debtor, instead of issuing a CSD to avoid any right to raise a defence, set off or cross-claim in response to the CSD.

2. SET-OFF AGAINST INSOLVENT CLAIMANTS

Another circumstance where a set off can be claimed in response to a claim under the SOP Act, is if the company making the payment claim is in liquidation and the debtor is owed money by the company in liquidation.

This is because there is an automatic set-off that arises under section 553C of the Corporations Act at the time that the company goes into liquidation.

Section 553C provides a statutory set-off scheme which operates where there have been "mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company." In those circumstances, section 553C provides for:

  1. an account to be taken of what is due from the one party to the other in respect of those mutual dealings; and
  2. a set off of the sum due from the one party to the other party; and
  3. only the balance of the account is admissible to proof against the company in liquidation, or is payable to the company in liquidation, as the case may be.

The practical effect of section 553C would include a situation where a liquidator is seeking to recover debts owed to the insolvent company under the SOP Act. Debtors could raise a set-off to satisfy the progress claim despite the restrictions imposed by the SOP Act, including in court proceedings.

The implications of the statutory set-off scheme were considered by Justice McDougall in Veolia Water Solutions & Technologies Pty Ltd v Kruger Engineering Australia Pty Ltd [2007] NSWSC 459:

"...the effect of the progress claim is accepted, because the amount is brought to account in the process of set-off. It may be that the process of satisfaction through set-off rather than satisfaction through payment has an adverse effect on other creditors. But that is a necessary consequence of the application of the scheme of set-off that the legislature, in section 553C, saw fit to enact."

3. MISLEADING AND DECEPTIVE CONDUCT

Misleading or deceptive conduct under the Australian Consumer Law may also be raised by a debtor as a defence in court proceedings which rely upon a claim under the SOP Act.

In Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9, the NSW Court of Appeal held that the SOP Act does not prevent a party from raising a defence that service of a payment claim was ineffective due to misleading or deceptive conduct.

In that case, a payment claim had been served on the appellant in circumstances where the appellant had appointed architects to handle the construction work and all previous claims had been sent to the architects. No copy was received by the architects and therefore a payment schedule had not been prepared or served in time by the architects on behalf of the appellant. The respondent was therefore unable to rely upon its judgment under the SOP Act against the appellant.

CONCLUSION

Whether you are a party claiming payment under the SOP Act or you are at the receiving end of a payment claim under the SOP Act, it is useful to be aware of the circumstances in which a claim under the SOP Act can be resisted so that you can either avoid, or take advantage of those circumstances.

NSW Fair Trading is in the process of carrying out a comprehensive review of all security of payment laws this year, with an online survey on security of payment laws recently closing on 25 September 2015. It is expected that the results of the survey will be used to inform a Fair Trading Discussion paper, which will be released later this year. Watch this space.

This article was written by Andrew Lacey, Principal, Fiona Lymant, Senior Associate, and Erin Turner Manners, Law Graduate.